Major American stock indices hit new highs after latest US CPI data

On Wednesday, all three major US stock indexes hit new records, fueled by the latest inflation data.

The Dow Jones Industrial Average climbed 351 points, or 0.9%, to mark its 18th record close of the year. The S&P 500 rose by 1.2%, achieving its 23rd record finish, while the Nasdaq Composite advanced 1.4%, securing its 8th record close of 2024.

In the S&P 500 index, technology stocks and the real estate sector led gains among its 11 major industry groups, rising 2.3% and 1.7% respectively.

This surge in equities was largely attributed to the latest US CPI (Consumer Price Index) report, which showed a year-over-year increase of 3.4% in April — slightly below the prior month’s figure and largely falling in line with forecasts. The annual increase in consumer prices has slowed from a peak of 9.1% in June 2022.

This smaller-than-expected rise in consumer inflation has raised investor expectations for potential interest rate cuts by the Federal Reserve.

Analysts say market could be “overreacting” to slightly cooler US CPI

Previous US CPI readings had come in hotter-than-expected — the previous dataset for March surprised to the upside, with the annual inflation reading coming in at 3.5% (vs. a 3.4% forecast).

Investor sentiment was also buoyed by a shift in expectations for interest rate cuts, with over 75% now anticipating a cut as early as September, up from 65% before the US CPI release, based on data from CME Group’s FedWatch tool.

Barron’s reporter Karishma Vanjani cautioned that the stock gains could signal an “overreaction” from the market:

“To be sure, the market's gains could be an overreaction. While the inflation print was softer than expected, the headline number is still way off the Fed’s 2% target. The central bank also needs to see more evidence to be confident about cutting rates”.

Chun Wang, a co-portfolio manager at Leuthold Group, was cited by Barron’s as saying:

“While we don’t believe a one-tenth of a per cent beat or miss should elicit an outsized market reaction, it’s what you get these days. The market was overreacting to a slightly hotter CPI last month and it’s doing that again with a slightly cooler report this month.”

US retail sales unexpectedly flat in April but equities continue rally

Other data released on Wednesday indicated that US retail sales for April were unexpectedly flat, impacted by higher gasoline prices which diverted spending from other goods, signaling a potential slowdown in consumer spending.

Equities extended gains from Tuesday, when Federal Reserve Chair Jerome Powell's comments on the economic outlook and inflation reassured markets following a report of hotter-than-expected producer prices for April: 

"I expect that inflation will move back down [...] on a monthly basis to levels that were more like the lower readings that we were having last year."

The rally has been supported by stronger-than-expected first-quarter earnings and hopes that the Fed can manage inflation without undermining economic growth, potentially leading to future rate cuts.

Nvidia stock leads megacap gains on Wednesday after cooler US CPI

Among megacap stocks, Nvidia shares led the gains in the S&P 500 on Wednesday, rising 3.6%. Microsoft and Apple were the next two biggest gainers on the SPX, advancing by 1.7% and 1.2% respectively.  

Super Micro Computer shares topped the percentage gains in the index with a 15.8% surge, reflecting investor enthusiasm for stocks tied to artificial intelligence technology demand.

As for corporate earnings, investors are eyeing Walmart's upcoming quarterly report, due early Thursday, for further insights into consumer spending trends. Walmart’s shares slightly dipped by 0.05%, continuing a three-day decline.

GameStop shares plummeted 18.9%, snapping this week’s rally ignited by “Roaring Kitty” Keith Gill, whose recent bullish comments had spurred another meme stock frenzy. Other meme stocks like AMC Entertainment and Koss Corp also suffered heavy losses, dropping 20% and 19.2% respectively.

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